2026 (1) TMI 51 - HC - Central Excise

Cenvat credit on imported smart cards sent for barcode pairing/testing-treated as job work u/r 4(5)(a), no reversal

Cenvat credit on imported smart cards was disputed on the ground that the cards were cleared 'as such' and that barcode pairing/testing at a third party ... Admissibility of Cenvat Credit availed by the assessee on smart cards - inputs are cleared ‘as such’ - activity of pairing and testing of smart cards and subsequent assembling of the Set Top Boxes falls within the term job-work or not - assessee has not maintained the job work register - HELD THAT:- The basic objective behind allowing Cenvat Credit on inputs, input services or capital goods is to provide instant credit of duties/taxes paid thereon and consequential reduction in the cost, by avoiding the cascading effect. The pairing and testing of smart cards with the Set Top Boxes get completed only when the bar code of the smart card matches with the bar code of Set Top Box, which is essential in providing access to DTH services under the conditional access system. The adjudicating authority has not considered the entire process but had considered only the part of it. There is no dispute regarding the facts, in a way that though the smart cards were imported, yet they were not inserted in the Set Top Boxes as it is. They were required to be given for processing to M/s. Trend Electronics Limited. Now, M/s. Trend Electronics Limited has not carried out any manufacturing activities as regards the smart cards received from the assessee. They have simply paired the bar code of the smart card with that of Set Top Box. Rule 2(n) of the Cenvat Credit Rules, 2004 prescribes “job work”. It means processing or working upon of raw material or semi-finished goods supplied to the job worker, so as to complete a part or whole of the process resulting in the manufacture or finishing of an article or any operation which is essential for aforesaid process. The testing and pairing was only with a view to see whether they are suitable for the customer i.e. the end user. If the Cenvat credit availed on inputs or capital goods are not used for the intended purpose then to counteract such eventualities, an embargo has also been created in the statute for not extending the benefit of Cenvat facility. Rule 2(n) has to be read in conjunction with Rule 4(5)(a)(i) of the Cenvat Credit Rules, 2004. Job work per se may or may not lead to manufacture. But the usage of the Rule 4(5)(a) is wide enough to cover any activity carried on the input by the job worker and in those cases the Cenvat credit on inputs need not be reversed under Rule 3(5) of the Cenvat Credit Rules, 2004. In fact, the facts of the case disclose that the operations of testing and pairing of the smart cards sent to the Set Top Box manufacturer would be covered under the phrase ‘further processing, testing or any other purpose.’ Thus, no substantial question of law is arising in the present matter - Appeal stands dismissed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether sending imported smart cards to the set top box manufacturer for barcode pairing and testing constituted 'job work'/permissible 'further processing, testing or any other purpose' under the Cenvat Credit Rules, 2004, so as to attract Rule 4(5)(a) and negate reversal under Rule 3(5). (ii) Whether, on the facts as assessed by the Tribunal, any substantial question of law arose warranting interference with the Tribunal's order allowing retention of Cenvat credit and quashing the demand. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Character of the activity and applicability of Rule 4(5)(a) vis-à-vis Rule 3(5) Legal framework (as discussed by the Court): The Court considered the definition of 'job work' under Rule 2(n) of the Cenvat Credit Rules, 2004, and held it must be read in conjunction with Rule 4(5)(a)(i). The Court also addressed the relationship between Rule 4(5)(a) (inputs sent out for processing/testing etc.) and Rule 3(5) (reversal where inputs are removed 'as such'). Interpretation and reasoning: The Court accepted the factual position that the smart cards were not inserted into set top boxes 'as it is' and were required to be sent for processing to the set top box manufacturer. It found that the set top box manufacturer did not perform manufacturing on the smart cards; it 'simply paired' the barcode of the smart card with the barcode of the set top box, and the testing and pairing was to ensure suitability for the end user under the conditional access system. The Court reasoned that 'job work' per se may or may not lead to manufacture, and Rule 4(5)(a) is wide enough to cover activities carried out on inputs by a job worker. On the facts, the operations of testing and pairing fell within 'further processing, testing or any other purpose,' and therefore Cenvat credit on such inputs need not be reversed under Rule 3(5). Conclusions: The Court upheld the view that the testing and pairing activity was covered under Rule 4(5)(a), and consequently the premise that the smart cards were cleared 'as such' requiring reversal under Rule 3(5) was not accepted on these facts. Issue (ii): Whether any substantial question of law arose from the Tribunal's decision Legal framework (as applied by the Court): The Court confined itself to examining whether the appeal raised any 'substantial question of law,' noting that assessment of facts is relevant only to the limited extent necessary to determine that threshold. Interpretation and reasoning: The Court found that the proposed questions-centering on whether credit could be retained and whether reversal was required-were not 'purely' substantial questions of law in light of the Tribunal's factual assessment and application of the rules to the established process of testing and pairing. Since the Tribunal's reasoning treated the activity as covered by Rule 4(5)(a) and not as a removal 'as such,' the Court considered no substantial legal question to survive for further adjudication in appeal. Conclusions: No substantial question of law arose; the appeal was dismissed.